Paying a Price for Free Shipping?

After aggressively cutting costs to achieve its first profit, Amazon.com Inc. is hoping to boost sales by offering free shipping indefinitely for big-ticket orders.

The new promotion was overshadowed last month when the company posted a profit of $5million, or 1 cent a share. Though free shipping offers have cost online retailers millions of dollars in the past--and even forced some to close--most analysts agree that the move should increase business for the company.

“If it’s not working ... you better believe they’ll drop it, but I think they’ve done enough analysis and seen enough historically to know that this is the right thing to do right now,” said George Sutton, managing director of RBC Capital Markets. “My guess is we’ll see a substantial impact on the amount of business that [Amazon] does.”

The shipping promotion will cost the company, but Amazon spokeswoman Kristin Schaefer said lower operating costs have allowed Amazon to pass the savings on to the consumer.

“It will be an investment for us in the short term,” Schaefer said. “But in the long term, we’ve learned that if you lower prices it drives volume.”

The company would not say how much it will spend on shipping.

With the new promotion, shipping is free for orders of more than $99, though shipping times are three to five days longer than standard ground shipping. The offer excludes some items sold on the site, including products purchased through the company’s partnerships with Target Corp. and Circuit City Group.

Amazon offered a similar shipping promotion during the holiday season.

Though free shipping is the leading incentive for people to buy online, Amazon’s minimum price for receiving it may be too high to draw some consumers, especially now that the holiday season is over, said Ken Cassar, a senior analyst with Jupiter Media Metrix. Barnes & Noble Inc., for instance, offers free shipping for orders of two or more items.

However, unless a company increases its prices when it offers free shipping, it must establish a reasonable price to avoid losing its profit margin, Cassar said.

For example, when online retailer Kozmo.com offered one-hour delivery for movies and junk food ordered online, it originally did not set a minimum purchase amount. As a result, Kozmo.com had to deliver small orders--sometimes nothing more than a pack of chewing gum--free, Cassar said. Although it later established a minimum order amount, the company eventually went out of business.

“You can’t win at low order sizes,” he said.

Since Amazon has traditionally offered free-shipping promotions when business is slow, the company may have to establish other promotions to encourage traffic, such as lowering the minimum price for getting free shipping or offering free gift wrapping, Sutton said. However, some analysts say the promotion, intended to spur business during a usually slow post-holiday season, will not last.

“This is temporary,” said Walter Loeb, president of Loeb Associates. “Longer term, I think we will see reasonable but very firm shipping charges.”

Regardless of how long Amazon extends its promotion, repeated offers of free shipping from online merchants may increase what consumers expect from them.

“Whatever the answer turns out to be, the online consumer is increasingly coming to believe that shipping is something that they don’t necessarily have to pay for, which may be dangerous for everyone,” Cassar said. “Except, I guess, for the consumers.”